Everyone Loses In Trump's Trade War with China
If we are to have a "trade war" with China, it would be best to win it. We should be better off after the fighting. Unfortunately, the chances of this happening seem slim to none, because President Trump's plan of attack suggests that everyone — us and them — will lose.
Interestingly, there's broad agreement over some of our war goals. Here's economist Peter Navarro, director of the White House Trade Council, writing in The Wall Street Journal:
"The Chinese government ... [has] audacious plans to dominate emerging technology industries. Many of these targeted sectors, such as artificial intelligence and robotics, have clear implications for defense. China seeks to achieve its goal of economic and military domination in part by acquiring the best American technology and intellectual property."
Hardly anyone doubts that China is on the hunt for advanced technologies by "legal means if possible, and illegal means, if necessary," as Michael Wessel of the U.S.-China Economic and Security Review Commission, a congressional watchdog agency, recently said.
In his Wall Street Journal piece, Navarro argued that "Trump's new tariffs will provide a critical shield against this aggression."
He's wrong. Indeed, focusing on reducing the U.S. trade deficit — more than $500 billion in 2017 — will make it much harder to impede China's ability to acquire advanced technologies on favorable terms.
As Brookings Institution economist David Dollar points out, the United States cannot accomplish this policing alone. Frustrated by U.S. technological restrictions, China could turn to other advanced countries — Japan, Germany, Canada, South Korea, France — for similar technologies. We do not hold a monopoly on advanced technologies. To be effective, we need a global coalition that will cooperate in curbing abuses. (Most routine technologies, it's worth noting, should be available on normal commercial terms.)
The trouble is that Trump's bombastic assaults against our traditional trading partners — and military allies — virtually guarantee that the essential cooperation will be difficult, if not impossible, to attain. "Trump's focus on the trade deficit is causing specific harms to American national security, including the distortion of U.S. [foreign] alliance relationships and loss of leverage against China," writes Derek Scissors of the conservative American Enterprise Institute.
Consider how. Trump has suggested imposing a 25% tariff on imported cars, trucks, sport utility vehicles and parts. This might reduce the trade deficit (in 2017, these U.S. imports totaled $324 billion from all countries, reports Scissors) but only because higher-priced vehicles would reduce consumer demand and vehicle production. Other countries would retaliate, says a study from the Peterson Institute. The estimated U.S. job loss would total 624,000 over one to three years.
The resulting antagonisms among our allies — already evident in their reaction to Trump's first steps to curb trade deficits — would intensify. The same countries that have advanced technologies (Japan, Germany, Canada and South Korea) are also auto exporters. "This is doing long-term damage. Trump is upending U.S. trade policy since World War II — one of the most successful policies in history," says economist Mark Zandi of Moody's Analytics.
The reality is that Trump's obsession with the trade deficit is misplaced. Since 1976, the United States has continuously run trade deficits on goods and services. If the United States were a normal country and the dollar a normal currency, a correction would have occurred long ago. The dollar would have dropped on foreign exchange markets, making U.S. exports cheaper and U.S. imports more expensive. Our trade would have swung toward balance or surplus.
But the United States is not any-old-country and the dollar is not any-old-currency. It continues as the most important global money, used to settle trade transactions and make cross-border investments. This extra demand for dollars props up its exchange rate. This makes U.S. exports costlier and imports cheaper. Deficits ensue.
Just what technology controls the United States should adopt to screen transactions with China isn't clear or easy. The ultimate outcome is likely to be some combination of added powers for the Committee on Foreign Investment in the United States, which oversees foreign investment here, and export controls, which regulate sales of technology abroad, says Martin Chorzempa of the Peterson Institute.
But whatever Congress and Trump do won't be effective unless it's matched by other major trading countries. Trump either doesn't realize this or doesn't care. He's infuriating the very countries whose support he desperately needs. His policies are more than misguided; they're backward.